New research shows how quality competition impacts social welfare in markets.
The article explores how different quality levels of products affect social welfare in markets with limited coverage. The researchers found that in markets with fixed quality costs, the best pricing strategy is to offer one product variant at a price that covers quality costs, leading to a partially unserved market. In markets with variable quality costs, it is optimal to offer both high- and low-quality variants, but market shares may not be equal. The study also shows that in duopoly markets, the quality spread is wider than the social optimum under variable costs, and quality is lower than optimal under fixed costs.